The Fed’s $4 Trillion Victory Lap

The Fed met yesterday and announced a continued tapering to its QE program citing improvement in the economy.

JM Bullion

Fed keeps faith in recovery, bumps up expected rate-hike path. Fed Says Economy Rebounding as It Trims Bond Purchases Reuters and Bloomberg headlines June 18, 2014 post Federal Open Market Committee meeting of the Federal Reserve Board.

$4 Trillion Later, The Fed Declares: “Mission Accomplished”

The Federal Reserve is taking a victory lap. The Fed insists that it is tapering and ending its $4 trillion quantitative easing (QE) dollar printing spree because the economy is “recovering” and they have hit their unemployment target and are near their inflation target.

The Fed is sticking to its economic recovery story even though the data does not support it. The Fed got some help recently from the European Central Bank when they announced that they would institute negative interest rates. Europe has a dreaded deflation threat whereas the United States can claim it has nearly a salubrious rate of inflation and a declining unemployment rate.

Indeed, the Fed is so confident of success there is talk of ending QE “early”. Here is a 60 Minute clip of Ben Bernanke in 2009 explaining the benefits of QE and when it might end. If QE ends this year it, along with a zero interest rate policy, will have been in effect from 2009-2014. The Fed has yet to clarify its plan as to when it might raise interest rates.

None of the economic facts seem to matter as the Fed is trumpeting economic “recovery” and the main stream media is echoing the cry. The Fed is claiming success on inflation and employment, while expressing worry about the housing market.


According to the Consumer Price Index (CPI), inflation is moving up and is now ahead of the Fed’s 2% annual rate – and the CPI understates inflation.

The price of gas, food, housing, energy and health care costs are all up near or above double digits on an annualized basis. The Fed insists, however, that inflation drives consumption and the economy and that there is not enough inflation yet. Actually, when wage and job growth are non existent and prices rise, LESS is consumed as it becomes price prohibitive to consume.

Lower prices drive spending and consumption. That is why stores have sales at reduced prices – to drive higher sales. They don’t raise prices and hope consumers buy more.


The unemployment rate after reaching over 10% in 2009 has dropped to 6.3%. The unemployment rate, however, is not a meaningful measurement of the state of the employment market and overstates the health of the labor market and the Fed admits as such. The labor force participation rate (along with the homeownership rate) has also fallen to a 36 year low as more people leave the labor force.

Housing Market

The Fed is willing to start making excuses for QE’s failure to ignite a broad based real estate market recovery (which itself was supposed to boost the overall economy) but is still clinging to the belief that QE has done the trick for the rest of the economy.

Janet Yellen recently told Congress that flattening housing activity “could prove more protracted than currently expected.” and cited “fresh risk in the housing market.” “Readings on housing activity — a sector that has been recovering since 2011 — have remained disappointing so far this year and will bear watching.”

The Fed Meets and Speaks

Here is what a few Fed Presidents and the Fed Chair Janet Yellen have been saying about the state of the economy, inflation, the labor market and their plans for ending QE and raising interest rates:

Chair of the Federal Reserve, Janet Yellen (dove)

Yesterday the Fed announced a further tapering of QE to purchasing only $35 billion a month of debt securities- $20 billion in U.S. Treasuries and $15 billion in mortgage backed securities.

In addressing the press after the FOMC meeting Ms. Yellen made the following points:


– the unemployment rate has declined more than expected;

– the unemployment rate is not by itself an accurate measure of the health of the labor market;

– employment has broadly improved and payrolls are rising;

– the labor participation rate has declined but that decline is in part due to demographics but also due to shadow unemployment and large amounts of discouraged workers but as the “labor market picks up steam” the decline should reverse; and

– the labor market has broadly improved and is expected to continue to do so.


– inflation remains below the Fed’s 2% target (Ms. Yellen does not admit that the CPI understates inflation);

– Fed policy as to when to raise interest rates will be balanced between the health of the labor market and whether the Fed’s inflation target is being met;

– to achieve the Fed’s inflation and employment targets highly accommodative policy is necessary; and

overshooting the Fed’s inflation target is an acceptable risk if continued accommodative policy helps the Fed attain its employment objectives.

On Markets, Bubbles and Consumer Spending

– expects emerging markets to recovery;

– the Fed doesn’t try to gauge what is the right price of the stock market;

– prices are within historical norms; and

– consumer spending will continue to grow at a modest pace as wage growth is higher than inflation

On Timing of Future Rate Hikes

-the Fed will keep rates low for a “considerable time” after QE ends which means it depends.


No one asked Ms. Yellen if she knew which entity or entities was buying enormous amounts of bonds out of Belgium.

Kansas City Fed President Ester George (hawk)

It’s hard to determine when and how much to increase interest rates when the economy is improving

Esther L. George, the Kansas City Fed President, echoed the “improving economy” theme in a recent speech noting the Fed’s is faced with the task of increasing interest rates in an improving economy that is much more difficult than cutting rates in a slowing economy. “This is especially true if the signals of sustainable growth are not entirely clear cut,” said Mr. George.

Saint Louis Fed President James Bullard (dove)

We are getting there, but we will be smarter about tightening monetary policy this time

James Bullard, President of St. Louis Federal Reserve Bank, spoke recently to the Tennessee Bankers Association Annual Meeting. Bullard’s comments were based on the title of his speech “How Far Is the FOMC From Its Goals?”

Bullard’s believes that the Fed closer to its inflation (2%) and full employment goals than at any time in the past five years. He said that unemployment has continued to decline and that inflation remains low but is hopeful that it is moving up towards its target.

In another speech in Florida earlier this month Bullard noted that the Fed did not react quickly enough the last time it was in a tightening cycle in 2004-06.

“I think the ’04-06 cycle was too methodical and did not react sufficiently to economic developments,” Bullard said, noting that the Fed seemed to have scheduled the rate hikes rather than implementing them based on economic conditions. “So, the committee was tightening policy, but the bubble was nevertheless developing under our noses,” Bullard said.

Federal Reserve Governor Jerome Powell

The labor market has improved substantially

Federal Reserve Governor Jerome Powell said recently in a speech at the Institute of International Finance’s spring meeting in London, the that he thinks the labor market has recovered but is concerned about the declining labor participation rate.

Powell said “For the last 2.5 years, [the U.S.] created just about 200,000 jobs per month … We would like to see it higher, but that’s still a pretty good number. If that continues, we’ll see significant progress,” Mr. Powell also noted the sharp decline in the labor-force-participation rate. “It has declined significantly more than simple demographics would indicate. That suggests that there’s a group of people who are not formally in the labor force, but would still like to work.”

Dallas Fed President Richard Fisher (hawk)

I’ll vote to end QE in October

Richard Fisher, said recently he would favor ending QE in October but would not favor increasing interest rates soon thereafter. “I will vote to end it in October,” Fisher said. “I don’t expect we’ll raise short-term rates this year,” Fisher added. The timing of a rate hike “depends on developments in the economy,” he said, including inflation and job growth. “I am not going to focus on raising rates until we have completed the wind-down.”

Fisher has often been an outspoken critic of QE, once calling it “monetary cocaine”.

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Further Reading:

The Fed is Conflicted on the Housing Market

An Astonishing and Persistent Denial of Economic Reality

European Central Bank’s Negative Interest Rates Help The Fed Exit QE

Negative Interest Rates In Europe Means European Banks Buy U.S. Treasuries

The Fed’s Economic Denial Persists, But The Weather Has Improved

The Fed Starts Talking About its Exit From QE

The Fed’s Economic Denial Persists, But the Weather Has Improved

The Fed is On Course to Be Behind the Curve

For Fed Presidents Economic Hope Springs Eternal in the Spring

Janet Yellen and Negative Interest Rates

Janet Yellen Overstates the Health of the Labor Market and Understates Inflation

Five Long Years in the Fed’s Potemkin QE village

To Continue or Not To Continue Tapering – Fed Presidents Muse

The Fed Starts Talking About its Decision to Taper QE

More Taper Talk From the Fed Presidents

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